In commercial real estate, a rebound

Tuesday

Feb 26, 2013 at 8:06 PM

But recovery will likely be slow and uneven

By JOSH SALMAN

Commercial real estate across Southwest Florida is showing the first signs of a comeback, with eager business operators opening new storefronts and employers expanding operations to accommodate post-recession growth.

But just as setbacks have long burdened housing, most in the industry predict that the commercial recovery will be long, slow and uneven.

An influx of Northerners now buying retirement homes and a stabilizing job market have heightened demand for consumer services from attorneys to dry cleaners. That, in turn, is leading to the slow absorption of the abundant commercial space vacated during the downturn.

The renewed interest among tenants has helped shrink vacancies to their lowest levels since the crash. But the availability of distressed buildings is still dragging on rents and preventing new construction from picking back up.

“Businesses are feeling more confident,” said Ian Black, who owns a commercial real estate brokerage in Sarasota and Manatee. “We have been in this for seven years now. The ones that have survived are taking advantage of market conditions.”

The rebound has been nowhere near as robust as in housing, but observers believe the market could get there by next year.

The 10.5 million square feet of commercial real estate between Sarasota and Manatee counties carried a combined 19.6 percent vacancy rate during December, the most recent data available.

That compares with 21.4 percent during the same time frame in 2011 and the 23 percent in 2010, quarterly reports compiled by Lakewood Ranch Commercial Realty show.

Leading the way

Demand is fiercest in areas that offer a healthy mix of retail, restaurant and general office space.

Choosey tenants also are looking for newer buildings that are more energy efficient, said Anthony Mazzucca, managing director of NIA Manasota.

Lakewood Ranch led the way with a 9.2 percent vacancy rate in December, followed by downtown Sarasota, at 13.4 percent, Manatee County at 20.7 percent, and Sarasota County at 26.8 percent.

On the other side of the spectrum, downtown Bradenton is the area still struggling the most, with a 36.2 percent December vacancy rate.

Brokers point to the age of buildings in the city, many of which would require major upgrades to lure the types of tenants now attracted to Lakewood Ranch, where buildings are predominantly less than 15 years old. A strong demand for housing in Lakewood Ranch, and its proximity to Interstate 75, also are drawing businesses.

Although south Manatee County has had a number of recent successes filling vacant commercial space — from the old Wellcraft Marine plant on Whitfield Avenue to the new DENTSPLY operation on U.S. 301 — general office space nearer to downtown continues to sputter, the report shows.

“There’s only so much demand in our market, and Lakewood Ranch is just too strong of competition,” said Mazzucca, the NIA broker. “In Bradenton, you don’t see any other services like brand-name retail, viable restaurants or other services that would draw tenants.”

‘A domino effect’

Most of the recent commercial improvements have been fanned by a housing market that is coming off its best sales year since the recession.

Many developers are back to building new homes to help fill a void left by an inventory of existing houses that has sunk to decade lows.

Commercial real estate pulls demand directly from those new rooftops, which add to an area’s overall consumer base and supports retail and back office operations.

But commercial real estate cycles typically lag their residential counterpart by about nine months to a year. During the Great Recession, the sector was slower to collapse than housing. As a result, the commercial recovery is now only in its infancy.

Also helping is a job market that has substantially improved. The unemployment rate in Sarasota and Manatee counties slipped 2.1 percentage points during 2012, declining to 7.8 percent in December.

That means more employers are hiring again and need additional room, said Barry Seidel, president and founder of American Property Group of Sarasota Inc.

“It all starts with housing,” Seidel said. “As construction starts up on homes, offices will fill up because people go back to work. That will translate to demand for attorneys, surveyors and those types of businesses. It also means more retail, with people who need to buy things for their new homes. It’s a domino effect.”

This modest progress in the commercial market has been consistent across the country.

National vacancy rates this year are expected to decline another 0.4 percentage point in the office market, 0.4 point in industrial, 0.3 point for retail and 0.1 point in multifamily, according to an index released this week by the National Association of Realtors.

Although the index does not track the Sarasota-Bradenton market, it projects similar growth across greater Tampa Bay and in Orlando.

Signs of life

Darrell Hoke, who owns Pelican Cottage in Osprey with his wife, Nicki, has seen business rise at the furniture store since moving from an industrial space about a year ago.

The couple is now retrofitting another 10,500-square-foot storefront in Osprey for their second retail outlet, the Flamingo’s Nest, which they expect to open in early March.

Brokers point to small business expansion, like the one now under way with the Hokes, as the primary driver to the hopes of a commercial real estate recovery.

“There’s been good growth for us,” Darrell Hoke said. “People are being more conscious of their recycling efforts, and that has helped our used side.” Their new store “will give us the opportunity to showcase more products.”

Multifamily has shown the strongest growth of the various commercial sectors, with investors snapping up multi-story apartment complexes across Southwest Florida, records show.

Retail also is showing signs of life, though analysts still are not sure how the new luxury shopping mall under construction on University Parkway will change the landscape.

An abundance of empty space left during recent closings by Albertsons, Sweetbay and Winn-Dixie also has posed a problem.

Because those empty storefronts are so large, they have been tough for brokers to fill with traditional tenants. Their departures also mean fewer patrons for nail salons, dry cleaners and small restaurants that leased in those centers, Seidel said.

General office space, which has seen demand shrink as technology allows more employees to work remotely, has been the slowest segment to recover.

Projects resurface

Average rents on commercial space also hover near industry lows.

That is the result of an over-supply of bank-owned foreclosures now available on the commercial market, the same phenomenon that has weighed on housing appreciation.

That has kept the phone lines quiet for most commercial builders in Southwest Florida, preventing them from hiring new workers.

“Commercial hasn’t arrived yet,” said Charles Wilson, a commercial builder in Sarasota. “But it’s better than it was a year ago.”

But some projects put on the hold during the Great Recession are again starting to resurface, leaving commercial builders with high hopes for the year ahead.

Lakewood Ranch-based Willis A. Smith Construction Inc., one of the region’s largest commercial contractors, was forced to focus mostly on government jobs and publicly funded schools during the downturn.

But company president David Sessions says private work is now picking back up. He expects more growth later this year and into 2014.

“Private funding for projects just stopped, but we’re starting to see our pipeline through 2015 pick back up again,” Sessions said. “There’s still a lot of empty office space that has to be absorbed. Much like with houses, that makes it less expensive to buy an existing facility than it would cost to build new.”